In this presentation, we’ll be examining an integrative study that helps a country develop a biofuels industry based on its domestic agricultural resources. This way the country will reduce the cost of oil imports and their impact on the country’s economy.

The case study focuses on Jamaica, which has a long history of agriculture. One of the country’s main crops is sugarcane -- although it has been in decline in recent years. This 2010 government study focused on the feasibility of producing ethanol and biodiesel in Jamaica. Government agencies collaborated with the country’s agriculture and energy experts, sugar mill owners, farmers, and the public for the study.

A link to this study is available in the “Resources” panel.

The purpose of the study was to assess the potential for the country to produce ethanol and biodiesel fuels from domestic feedstocks and power from agricultural biomass. The study examined market potential, techno-economic aspects, opportunities to produce electricity, institutional resources, public outreach, and private sector opportunities.

One of the first tasks of the study was to identify the biofuel stakeholders in the country in order to hear their perspectives and ensure “buy-in” from as many as possible. The list is quite exhaustive and includes government, sugar mill owners and farmers, auto repair shops, fuel distributors, academia, the general public, and media.

At the time of the study, Jamaica had already established an E10 mandate with assistance from the European Union. The mandate was met by importing 20 million gallons of corn ethanol from the U.S. to blend with 200 million gallons of gasoline annually. The state-owned oil company Petrojam was handling the entire supply chain of ethanol.

For Jamaica to produce its own ethanol, it will have to look at its sugarcane industry, which processes cane to sugar and molasses.

A sugar mill can co-produce ethanol with the addition of fermentation and distillation capabilities -- along with other peripheral systems.

The key components of the study were a techno-economic evaluation, a number of pilot projects, support for policy formulation, public outreach, defining investment requirements, and composing a plan for implementation of the study’s recommendations.

Several critical factors were identified by the study. Biomass resources are the most important. A local biofuels industry is not feasible without them. Equally important are human and institutional resources along with healthy economics, distribution of biofuels, status of the technologies, and risk assessment.

This map illustrates the country’s agronomic resources at the time. It shows the production of various crops, including sugarcane. In order for Jamaica to produce its own ethanol to meet the E10 mandate, 47,000 hectares of land is required for sugar cane cultivation. This seems possible since 79,500 hectares of land are available in the country.

For ethanol production to be cost-effective, farmland will need to produce higher yields. This graph shows how Brazil improved crop productivity with more experience producing crops for biofuels. Between 1975 and 2004 Brazilian productivity doubled from 40 to 80 gallons per hectare of sugar cane.

A future Jamaican ethanol industry can be built based on the current country’s sugarcane mills producing ethanol seasonally. Extra electricity will be produced year-round from agricultural residues, such as sugarcane bagasse.

Here’s how it can be done. A sugar mill processes 393,000 metric tons of sugarcane per year When retrofitted with ethanol production capabilities, the mill will be able to produce not just sugar, but also almost 9,000,000 gallons of ethanol and 26,000 million watt hours of electricity.

The ability to co-produce electricity is important to a sugar mill because the renewable energy produced from local biomass can be sold to the country’s electric utility to help defray the costs of producing biofuels. The rate charged for the electricity is essential in determining profitability.

The rate should be competitive because the sugar mill’s electricity will save the utility money on imported fuel. It will also save the utility money by not having to create or upgrade the existing energy infrastructure. Currently, Jamaica uses old oil-fired power stations that result in higher fuel costs. To meet increased future power demands, the utility would need to spend money upgrading their power capacity.

This table shows the new revenue generated by a sugar mill that has expanded into ethanol production. The biofuel brings in almost 17 million dollars at a market price of 50 cents per liter or $1.89 per gallon. However, the mill loses revenue from diverting sugar and molasses to ethanol production. More specifically, the mill lost almost 18 million dollars at a market price of 480 dollars per metric ton of sugar and 60 dollars per metric ton of molasses sold as animal feed. This is where electricity makes a significant contribution. Due to nearly 4 million dollars earned from bagasse-based electricity valued at just 15 cents per kilowatt-hour, the mill generates an additional revenue of 3.9 million dollars.
Overall, the expanded mill operation with ethanol production benefits its owners to the tune of almost 2.8 million dollars annually.

As expected, the higher the market price of sugar, the lower the internal rate return, or I-R-R, on the investment for a sugarcane ethanol mill because of the lost sugar revenue. As shown in this graph, if the price of sugar increases from 425 dollars to 475 dollars per metric ton, the expanded mill will suffer a significant decrease in IRR by almost 10%.

Conversely, the higher the ethanol price in the marketplace, the higher the IRR of the mill. A 10-cents per gallon higher ethanol price increases the mill’s IRR by almost 20%.

In addition to ethanol, Jamaica also has the potential to produce biodiesel. In fact, Petrojam, the country’s oil company, has adopted B-5 blends, which means 3 million gallons of biodiesel is needed per year. This figure is too low to justify the creation of a biodiesel industry. However, if biodiesel is also considered as a replacement for the highly-polluting heavy fuel oil used in power generation engines, then the market size increases to 100 million gallons per year -- a good size market for the country.

A biodiesel industry will be built based on production of the biofuel from local resources. The process is shown in a simplified form here. A variety of oil-bearing seeds, such as castor beans and jatropha, as well as recycled oil would serve as feedstocks for conversion to biodiesel using commercially available trans-esterification technology.

Since a biodiesel market does not currently exist in the country, oil crops will have to be carefully analyzed to identify the most appropriate ones for Jamaican farmers. Mechanized production of castor and soy could be less costly, but they could compete for land with sugarcane. Also, soy has good value and could create food versus fuel issues. Oil palms produce the highest oil yields and their leftover fiber could serve as a source of biomass for power generation.

Once a decision is made to proceed with a biofuels project, a significant amount of development work needs to be done by the project owners, as shown here. To qualify for financing, the owners will need to secure long-term contracts with suppliers and partners for feedstock and products. In addition, they will need competent contractors to design, construct, operate, and maintain the biofuels plant.

Doing business in Latin America is challenging in many regards. Investors prefer countries where a long-term biofuels policy is in place and there is cooperation among local stakeholders. They appreciate a positive investment climate, regulatory and legal climate, as well as community support for biofuels. They also prefer lack of trade barriers to allow exports to foreign markets.

Financing is essential to a biofuels project. Usually financing comes in the form of a combination of debt and equity. Debt is secured from banks, whereas equity comes from investors. An experienced management team is also essential.

Given the political and regulatory risks of developing countries, project financing by foreign investors and banks may be difficult to acquire. Instead, sugar estate owners in Jamaica may be able to raise the necessary capital to expand their operation into ethanol production. A biofuels investment fund that pools capital from various sources could be a good source of financing.

This fund could work with partners to achieve price stabilization for the produced biofuel. Stabilization could be obtained when a portion of the revenue is set aside when prices are high. When prices are low, those reserves will help maintain financial stability. This way the fund will hedge against the market risk, which leaves investors susceptible over the long run.

Additional financing mechanisms include loans to developers and farmers, as well as technical expertise provided by state organizations. For small farmers, loans could be granted in the form of service and equipment to upgrade their productivity. The loans could be repaid from sugarcane sales. A biofuels investment fund could be established and administered by the Development Bank of Jamaica and the country’s Agricultural Support Services Project.

Long-term energy policy is also essential to the establishment of a biofuels industry. Possible components include biofuel blend mandates, subsidies to producers and farmers, tax breaks, low-cost loan, biofuel R and D grants, and tax refunds on flex-fuel vehicles.

The lack of policy, on the other hand, makes biofuels a high-risk investment. Political uncertainty, weak legal and regulatory framework, lack of business incentives, and low oil prices reduce the attractiveness of creating a biofuels industry in a country.

To establish biofuels in Jamaica, many steps need to be taken, starting with institutional engagement, public outreach, surveillance of technology, feasibility studies, financing mechanisms, feedstock and electricity pricing, and capacity development.

The creation of a biofuels task force is highly recommended to coordinate efforts among the various stakeholders. Its tasks include identifying needs for future studies, resolving disagreements, coordinating activities, monitoring and communicating progress, and keeping the public engaged.

Public education and outreach is key to establishing a new industry, such as biofuels. Engaging stakeholders and consumers, getting the media involved, and keeping the public informed about progress will increase the chances of success.

Development of research and technology in the country is another critical factor. Agricultural research agencies and local universities can help farmers with expert advice about crop selection, cultivation, and harvesting and can promote the dissemination of crucial technical information.

Investment decision-makers will want to see a detailed feasibility study that will generate specific information about conceptual design, key process components, energy and mass balances, capital and operating costs, and revenue projections. Other considerations include the coproduction of ethanol and electricity and the flexible co-production of sugar, molasses, ethanol, and electricity - similar to the ones currently used in Brazil.

Sugar mills will be selected by investors based on the owner’s interest and willingness to share information. Financial support for the feasibility study will be sought from a number of organizations with the assistance of the Biofuels Task Force.

The outcome of the feasibility study will be to identify and document viable investment opportunities, thus leading to financing, construction, and operation of biofuel facilities, and to provide information about the impact of such facilities to policy makers.

Countries like Jamaica can benefit from technical exchanges with Brazil and the U.S., where biofuels industries are well established. The capacity of the country can be further enhanced through technical and business courses and conferences, engagement of existing local resources, studies by outside experts, and the activities of the task force.

The preliminary study that we just reviewed reached several conclusions. A domestic biofuels industry will bring Jamaica increased investment and more employment. It will also increase rural development and utilize the country’s land suitable for additional sugar cane cultivation that can be converted to the production of sugar, molasses, rum, and ethanol.

Ethanol from sugarcane is more economically promising than biodiesel from oil seed crops. However, year-round mill operation will be necessary by using appropriate sugar cane varieties and perhaps energy crops as well. Co-generation of power from biomass will enhance the economics of biofuels.

Biodiesel for B5 and power generation may need to be subsidized by the government, but it could be justified as a measure to combat rural poverty, as done in Brazil. Large-scale development of oil crops is likely to compete with food crops and sugar cane, which are the country’s staples.
Education of the public is essential to building capacity in Jamaica. Finally, the government needs to create a positive financial framework to attract investors and launch this new industry that can help the local economy become more sustainable.